Keynes, Uncertainty and the Global Economy
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Keynes, Uncertainty and the Global Economy

Beyond Keynes, Volume Two

Edited by Shelia C. Dow and John Hillard

The revival of interest in Keynesian economics since the late 1980s reinstates the importance of Keynes’s contribution to economic theory and policy. This is the second of two volumes in which authoritative contributions are presented by an outstanding group of international experts to celebrate Keynesian economics, and to review and further the developments of post Keynesian economics of recent years.
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Chapter 10: Realism, econometrics and Post Keynesian economics

Beyond Keynes, Volume Two

Paul Downward

Extract

10. Speculation and reasonableness: a non-Bayesian theory of rationality Anna Carabelli1 I INTRODUCTION In the recent discussion on financial markets two main currents have crossed. One revives Keynes’s discussion on speculation and liquidity preference and the connection between these concepts and uncertainty and probability in A Treatise on Probability (TP). The other derives from Bayesian theory and focuses on situations which generate paradoxes and anomalies of rational behaviour in financial markets considered ‘efficient’, namely situations which give rise to situations of uncertainty à la Keynes, Knight and Shackle. The first current analyses the rationality or irrationality of speculative behaviour and liquidity preference and the role of conventions in financial markets. In various ways this opposes the explanation of financial markets as efficient markets and reconnects with Victoria Chick’s idea that Keynes’s liquidity and speculation find no place in Keynesian theory or in Tobin who, in Chick’s view, reduces uncertainty to calculable risk (Chick, 1983: 214–16). These studies are also linked to a Post Keynesian view of uncertainty based upon non-measurable probabilities. Many authors have recently analysed Keynes’s contribution to the analysis of financial markets – often in a critical manner. These include Cottrell, Davis, Lawlor, Mini, Pratten, Runde and Winslow and are all connected to the discussion of the role and relevance of TP in the interpretation of Keynes’s method in economics. They raise two main questions pertinent to this paper: in the General Theory, is Keynes adopting a subjectivist Bayesian probability or a logical probability in line with...

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